One Strong Arm Tactic of Apple's as Presented by GTAT

The following is just one segment from GTAT's Chapter 11 unsealed document.

Apple Tells GTAT That It Doesn't Negotiate Contracts

What ensued was anything but an arm's-length negotiation. Apple simply dictated the terms and conditions of the deal to GTAT. Apple advised that (a) GTAT's management should ''not waste their time" trying to negotiate as would normally occur in commercial transactions because Apple does not negotiate with its suppliers and (b) GTAT had to agree to all of Apple's material terms and the draft agreements prepared by Apple's attorneys, or the deal was off. Remarkably, Apple's chief legal negotiator on certain key aspects of the transaction was Apple's Senior (Bankruptcy) Restructuring Counsel. It goes without saying that this speaks volumes about Apple's perspective on the transaction it was about to enter into less than one year ago.

The following terms are illustrative of Apple's approach to the transaction:

• Apple required GTAT to commit to supply millions of units of sapphire material, but Apple has no obligation to buy any of that sapphire material.

• Apple required GTAT to form a wholly-owned subsidiary, Debtor GT Advanced Equipment Holding LLC ("GT Equipment"), in October 2013 to implement a convoluted and artificial structure that serves no economic purpose-other than protecting Apple-such that GTAT Corp. would be obligated to buy and assemble furnaces for Apple, but the cash and furnaces would then be "round­tripped" through GT Equipment, a so-called "bankruptcy remote entity" using an illusory sale and leaseback between GTAT Corp. and GT Equipment.

• Apple took a security interest in the entity referred to in the documents as the "bankruptcy remote entity," which Apple designed to hold the furnaces.

• GTAT-was-prohibited, for years to come, from conducting any sapphire business with any conceivable Apple competitor or any direct and indirect supplier to an Apple competitor.

The various agreements Apple presented to GTAT as a condition for a business collaboration with Apple are best described as "adhesion contracts." A "best of ' collection of the contractual terms is provided below to explain what Apple, foisted on OTAT:

• If GTAT discloses any aspect of the agreements with Apple, it is liable for breach of confidentiality to Apple for $50 million per occurrence as liquidated damages; Apple, on the other hand, is not liable for any liquidated damages if it violates confidentiality.

• GTAT must accept and fulfill any purchase order placed by Apple on the date selected by Apple. If there is any delay, GTAT must either use expedited shipping (at its own cost) or purchase substitute goods (at its own cost). If OTAT's delivery is late, GTAT must pay $320,000 per boule of sapphire (and $77 per millimeter of sapphire material) as liquidated damages to Apple. To put th is figure in perspective, a boule has a cost of less than $20,000. Apple, however, has the right, without compensating GTAT, to cancel a purchase order. in whole or i n part at any time and reschedule a delivery date at any time.

• GTAT must pay $640,000 per boule that it sells to a third party in violation of the exclusivity restrictions in the contract. Apple has no obligation to buy boules exclusively from OTAT.

• GTAT must pay $650,000 per month for any sapphire furnace that is used in violation of OTAT's exclusivity obligations to Apple. To put this figure in perspective, furnaces provided as part of the transactions with Apple were provided at a one-time total cost of approximately $200,000 per furnace. Apple has no exclusivity obligations to GTAT.

• GTAT is prohibited from modifying any equipment, specifications, manufacturing process or materials without Apple's prior consent. Apple, on the other hand, can modify any of these terms at any time and GTAT must immediately implement Apple's modifications.

• If Apple exercises a Termination Event, and becomes a "lessee" of the furnaces and related equipment in the Mesa Facility, the rental amount Apple would pay to GT Equipment is $50 per month, as compared with the $9.9 million monthly rent payment that OTAT Corp. is "deemed" to pay to GT Equipment under its "lease" with GT Equipment.

• Apple enjoys an "exclusive right of negotiation," which is basically a provision that forces GTAT to negotiate exclusively with Apple for thirty days if it seeks to sell substantially all assets or its sapphire business or it receives an expression of interest from a third party. If GTAT violates this provision it must pay Apple $1 billion. Of course, Apple has no such corresponding obligation to GTAT.

• Apple cannot be liable to GTAT for any design defects or consequential damages from product flaws occurring at the Mesa Facility, which Apple owns, unless GTAT proves that the causes of those defects or flaws were solely Apple's fault.

• Apple drafted and structured 14 separate agreements purporting to reflect separate transactions among GTAT Corp., and its subsidiary, GT Equipment. But all of these agreements have cross-termination provisions that clearly show how Apple exercised control over the operations and assets related to this transaction.

• GTAT sends the sapphire material it produces to two of Apple's "captive" vendors in Asia. Those vendors further process the sapphire material into an end product. If there is a question about whether the sapphire product OTAT ships to Asia is defective, a "committee" of three parties, comprised of GTAT, Apple and one of the two "captive" vendor in Asia, answer that question, with each party getting one vote on whether GTAT was at fault or not. It is not difficult to see what the outcome of this vote would be.

• If Apple terminates the SOW (as defined herein) for cause, then GT Equipment must immediately repay the intercompany loan from GTAT Corp. By contrast, if GTAT Corp. terminates the SOW for cause, there is no acceleration of the loan obligations.

You can review more of this document in PDF form here.

In another report, Bloomberg weighed in from a different angle later today by stating that "Investor confidence in Apple Inc.'s suppliers and vendors is wavering in the stock market after the bankruptcy of GT Advanced Technologies Inc. last month wiped out 92 percent of its value in a single day"

Mike Balkin, manager of the $535 million William Blair SmallCap Growth Fund stated by phone with Bloomberg that "After GT, you go back and look at all your companies that do business with Apple and ask how exposed you are, what kind of risk are you subject to. Anytime we look at a company that has a large customer concentration it gives us pause because Apple is one announcement away from putting the company in trouble." For more on this angle of the story, see the full Bloomberg report.

Today, most of what we're hearing and reading about is from GTAT's bankruptcy document which has to be as negative as possible by its very nature. Bloomberg's Corey Johnson smartly reminded us all that GTAT didn't think it was a bad deal with Apple in the beginning and pounded the table that it was a game changer for them. So there's a huge credibility gap here, if not canyon, in their story and that's why the SEC revealed that they're now investigating GTAT.

Once again, this is an interesting segment in the Apple-GTAT saga, though I highly doubt that it's going to be the last that we'll hear on this matter. Stay tuned.

About Making Comments on our Site: Patently Apple reserves the right to post, dismiss or edit any comments. Comments are reviewed daily from 4am to 7pm PST and sporadically over the weekend.